The Market Today
Fed Hits Inflation Target for First Time in Six Years
by Craig Dismuke, Dudley Carter
Disposable Income Boosted by Lower Taxes, Spending Disappoints in Rare (Lately), Weak Report: In a late-week barrage of economic reports, the first disappointing report in several weeks showed personal spending rose just 0.2% MoM in May, flat on an inflation-adjusted basis. Spending was also revised down for April from +0.6% to +0.5%. Personal income rose 0.4% MoM, in-line with expectations, but was accompanied by a downward revision from +0.3% to +0.2% for the April income figures. All told, income and spending both ended May a bit weaker than expected coming into this morning’s release. On a very positive note, tax and non-tax payments were down another 0.2% MoM helping lift disposable income 0.4% in May, almost a 5.0% annualized growth rate. Also positive, the weaker spending figures helped push the savings rate up from 3.0% to 3.2%, now notably stronger than the recent nadir of 2.4% in December.
Fed Hits Inflation Target for First Time in Six Years: Also released this morning, May’s PCE inflation report showed slightly firmer price gains on unusually large increases in recreation, lodging away from home, clothing, and prescription drug prices. The index rose 0.2% MoM, in-line with expectations once rounded to the nearest tenth, but enough to raise the year-over-year rate from 1.8% to 2.0%, one-tenth more than expected. This marks the first time in six years (April 2012) that the Fed has hit its inflation target on its preferred measure of inflation. Going forward, PCE inflation is expected to remain fractionally above the 2.0% target, but not high enough to alter Fed policy at this point.
Consumer Confidence and U.S. Trade Policy: At 9:00 a.m. CT, the University of Michigan Consumer Confidence report is expected to show a slight pullback from an already-high level. Watch for changes in future expectations which tend to respond to changes in gasoline and stock prices. More important to the markets, U.S. officials are slated to outline their plan to restrict Chinese investment in U.S. technology today or tomorrow.
Yesterday – Stocks Recovered on Rebound in Tech and Financials, Treasury Curve Steepened: U.S. stocks rebounded Thursday, despite disappointing closes earlier in the day across Asia and Europe. The major indexes moved in and out of positive territory during the morning session but found another gear just before lunch. The S&P 500 climbed steadily throughout the afternoon and finished up 0.6%, splitting gains for the Dow (+0.4%) and the Nasdaq (+0.8%). Technology companies recovered and bank stocks ended their record losing streak at 13 days. The financials sector closed up 0.9%, cutting into its nearly 6% loss racked up over those 13 days of declines. After the markets closed, the Fed released part two of its bank stress test results. Goldman Sachs and Morgan Stanley will have to keep capital returns consistent with last year, six other institutions were told to trim their planned payouts, and Deutsche Bank’s U.S. unit failed. After keeping the indexes propped up over the prior two days, energy companies slipped a small 0.1% even as U.S. crude moved up to a new three-and-a-half-year high. Also breaking with the recent trend, the spread between the 2-year and 10-year Treasury yields steepened for the first time in six sessions. The 2-year yield (2.51%) added 0.6 bps while the 10-year yield (2.84%) rose a larger 1.1 bps.
Overnight – Investors Attempt to End June Upbeat: Investors caught that Friday feeling overnight it seems, placing worries around trade on the backburner long enough to push equities higher in the final trading day of the quarter. Chinese equities remained in a bear market but bounced more than 2% to lead gains across Asia. European equities were higher by 1% and U.S. futures were pointing to a second day of gains. The cheerful tone in equities was briefly disrupted by a headline that President Trump has told advisors he wants to withdraw from the WTO. After tapping the brakes on the headlines, equities quickly moved back up and the White House subsequently said the report wasn’t accurate. The S&P 500 and Nasdaq are both positive for June but the Dow will need a 200-point gain to end up for the month. Sovereign yields were mixed and more subdued, save a notable drop in the Italian curve. The move lower in Italian yields was likely tied into the sharp spike in the Euro, which coincided with a news headline that EU leaders had reached a deal aimed to ease wide-ranging concerns around migration. On the data front, a couple of Friday reports likely caught the attention of major central bankers. In Japan, the unemployment rate fell unexpectedly to 2.2%, its lowest level since 1992, and a leading indicator for inflation perked up more than expected. In Europe, higher oil prices helped inflation rise to 2.0% in June, exceeding the ECB’s target of “below, but close to, 2%” but matching estimates. Core inflation slowed to 1.0% YoY. After this morning’s inflation data, the 2-year yield (+1.4 bps) was leading the Treasury curve higher and flatter. With the 10-year yield up just 0.9 bps, the spread between the two feel to a new cycle low of 0.317%.
Thursday Fedspeak: St. Louis Fed President Bullard (2019 voter) again said yield curve inversion is a key near-term risk for the Fed and that responding to possible effects of fiscal stimulus with more monetary tightening is unnecessary. He believes that any boost from fiscal policy could be brief and may not be inflationary. Boston’s Rosengren (2019 voter) told the WSJ that “When you don’t take the punch bowl away, it’s not that predictable what is going to happen. …What you do know is the conditions for bad outcomes have increased. …we’re at a stage of the cycle [where] I do worry about imbalances if we push the economy too hard.” Atlanta’s Bostic (2018 voter) again said he’s watching the yield curve and noted he would be comfortable with slowing the pace of tightening. Kashkari from Minneapolis (2020 voter) said the modest pace of wage growth signals there is still slack left in the labor market and added the Fed should stop once it gets to a neutral setting, which he believes is likely one or two hikes away. He added, “Once we get to neutral, are we going to go beyond neutral, and does the data — does the wage growth, does the inflation data — actually support moving to a contractionary monetary policy? …So far, the data does not support that.”